South Korea is to require banks to hold an adequate amount of liquid foreign-currency assets as a buffer against capital outflows during external shocks.
Starting next year, local banks are to be required to hold at least 60 percent of the expected amount of foreign-currency outflows during a one-month crisis as highly liquid assets, according to a joint statement yesterday from the South Korean Ministry of Finance, financial regulators and the Bank of Korea. The so-called foreign-currency liquidity coverage ratio has so far been a recommendation, not a regulation, to banks in South Korea.
The government also loosened restrictions on currency forward positions to 40 percent of their capital for local banks from 30 percent, and for foreign banks’ branches to 200 percent from 150 percent. A higher cap means banks have more leeway in using derivatives to borrow US dollars, which can help in times of financial market volatility. The new limits are to be applied starting next month.
The rule changes come amid uncertainty in global financial markets, with a possible rate increase looming from the US Federal Reserve and Britain’s potential exit from the EU raising risks of capital outflows from South Korea, the statement said. Other unnecessary foreign-currency liquidity regulations are to be eliminated with adoption of the liquidity coverage ratio, the statement showed.
South Korea’s capital-flow control measures were introduced in 2010 when the nation was worried about too much inflow strengthening the won and a rise in short-term external debt. With South Korea no longer facing huge inflow pressure, policymakers have been voicing the need to adjust regulations to reflect changes in economic situations.
The foreign-currency liquidity coverage ratio is not to be applied to foreign banks’ branches within South Korea as their headquarters are to be subject to regulations of their relevant nations. Different ratios are to be applied to policy banks such as the Korea Development Bank.
Overseas investors bought 3 trillion won (US$2.5 billion) more of South Korean stocks than they sold this year through last month, while cutting holdings of local debt by 2.6 trillion won, data from the financial regulator showed. The won’s movement has been volatile this year as expectations of a Fed interest rate increase have changed. It appreciated 1.6 percent against the US dollar this month, having weakened about 4 percent in the previous two months.
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